Articles
What's My Company Worth?
A business valuation can give you the answer
As a business owner, you know it's important to obtain a business valuation in preparation for your retirement. But did you know that appraising your company’s worth has several other important uses?
Selling the company (or buying another one)
If you're selling your company or buying another one, you need to put a dollar amount on the deal. As a seller, a valuation will not only estimate how much your company is worth, but also offer insights into how you can improve it. If you're a buyer, your appraiser can scrutinize any assumptions the seller’s appraiser uses to justify the sale price.
Business appraisers typically use one or more methods to value a company: 1) a market approach, which takes data from the sales of comparable businesses and then adjusts it to account for the differences between the subject company and the comparable businesses, 2) an income approach, which forecasts the company’s future net cash flow or earnings and adjusts them to present value using a discount rate that takes into account risk, and 3) an asset-based approach, also called the adjusted book value method, which establishes the value of all assets and liabilities.
Creating or updating a buy-sell agreement
A buy-sell agreement is an important tool for succession planning. Sudden death or disability, loss of employment or a divorce can all throw a business into chaos if such an agreement isn't in place.
A professional appraiser can help establish a clearly defined standard of value for your buy-sell agreement and determine (and regularly update) a formula for calculating that value. Doing so can prevent any number of conflicts down the road.
Pending divorce
The end of a marriage can be a particularly chaotic and emotional time, increasing the risk that business issues go ignored or mishandled. For this reason, obtaining a valuation during a divorce can serve as a critical protective measure.
Appraisers generally apply so-called going concern valuation methods (such as those discussed for selling the company) to functioning businesses that are expected to continue operations following a divorce.
Creating or updating your estate plan
Whether you're planning to gift or sell ownership interests in your business to your heirs during your lifetime or the interests will remain in your estate at your death, a professional appraisal is a must. A company's value affects the tax-related costs of selling, gifting or bequeathing interests in it.
Failing to estimate value properly may leave your heirs on the hook for a sizable estate tax bill that could force them to sell your company after your death.
Weighing the pros and cons
Even though engaging a professional appraiser can be costly and time consuming, a business valuation is necessary for a variety of business and personal reasons. Consult with your tax and business advisors to best determine when a business valuation is needed.
